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Cory Doctorow @pluralistic@mamot.fr Red Team Blues

Apr 24 • 67 tweets • 16 min read Twitter logo

@propublica

With the #IRSFiles, @propublica ripped away the veil of performative complexity disguising the scams that the ultra-rich use to amass billions and billions (and billions and billions) of dollars, paying next to no tax, or even no tax at all.

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If you'd like an essay-formatted version of this thread to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

pluralistic.net/2023/04/24/tax…

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Each scam is its own little shell game, a set of semantic and accounting tricks used to gussy up otherwise banal rip-offs. The finance sector has a cute name for this kind of complexity: #MEGO, which stands for "#MyEyesGlazeOver."

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If you're trying to rip off a mark, you just pad out the prospectus, make it so thick they decide there *must* be something good in there, the same way that any pile of shit that's sufficiently large must have a pony under it...somewhere.

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Propublica's writers haven't merely confirmed just how little America's oligarchs pay in tax - they've also de-MEGO-ized each of these scams.

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Take the way that #PeterThiel used the #RothIRA - a tax-shelter for middle-class earners to help save a few thousand dollars for retirement - to make *$5 billion* without paying *one cent* in tax:

pluralistic.net/2021/06/26/wax…

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One of my favorite IRS Files reports described how #SteveBallmer - the billionaire ex-CEO of #Microsoft - laundered vast fortunes into a state of tax-free grace by creating hundreds of millions in "losses" from his basketball team, the #LAClippers.

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Ballmer paid 12% tax on the $656 million he took out of the Clippers - while the players whose labor generated that fortune paid 30-40% on their earnings:

pluralistic.net/2021/07/08/tuy…

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That was PP's first Ballmer story, back in 2021. They ran a followup last Feb that I missed (I was on a book tour in Oz), and it's *wild*: a tale of "#LossHarvesting," a form of fuckery involving #GoldmanSachs that's depraved even by their standards:

propublica.org/article/irs-fi…

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Loss farming is a scam that was invented in the 1920s, whereupon it was promptly banned by Congress. But Goldman and other plutocrat Renfields have come up with tiny modern variations on this century-old con that the IRS is either unable or unwilling to address.

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Here's how it works. Say you've got a stock portfolio where some of the stocks have gone up and others have gone down. You want to sell the high stocks and hang onto the low ones until they bounce back.

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But if you sell those stocks that have gone up you have to "realize" the profit from them and pay 20% capital gains tax on them (capital gains tax is the tax you pay on money you get from owning things; it's *much* lower than income tax - the tax you pay for *doing* things).

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But you pay tax on your *net* gains - the profits you've made minus losses you've suffered. What if you sold those loser stocks at the same time? If you made a million on the good stocks and lost a million on the bad ones, your net income is zero - and so is your tax bill.

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The problem is that selling stocks when they've gone down is a surefire way to go broke. Every investing book starts with this advice: you will be tempted to hold onto your stocks that are going up, because they might continue to go up.

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You'll be tempted to sell your stocks that are going down, because they may continue to go down. But if you do that, you'll *only* sell the stocks that have lost money, and never sell the stocks that have *made* money, and so you will lose everything.

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Back when the pandemic started, your shares in movie theater chains were in the toilet, while your stock in tech companies shot through the roof. If you sold the tech stocks then and held onto your movie stocks and sold them now, you'd have cleaned up.

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Today, tech stocks are down and movie theater stocks are up. But if you sold the cinema shares when they bottomed out, and held onto your tech stocks when they were peaking, you'd be busted today.

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So selling your loser stocks to offset gains from your winners is a bad idea. That's where loss-farming comes in: what if you sold your tech stocks at peak, and sold your bottomed-out cinema stocks at the same time, but then *bought* the cinema stocks again, right away?

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That way you'd have the "loss" from selling the cinema stocks, but you'd *still* have the stocks.

That's called "#WashTrading," and Congress promptly banned it.

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If you've heard of wash-trading, it's probably something you picked up during the #NFT bubble, which was a cesspit of illegal wash-trading. Remember all those eye-popping NFT sales?

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It was just grifters with multiple wallets, buying NFTs from themselves, making it seem like there was this huge, white-hot market for monkey JPEGs. Wash-trading.

Turns out that crypto really did democratize finance...fraud.

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Wash-trading has been illegal for a century, but brokerages have invented modern variations on the theme that are legal-ish, and the most lucrative versions of these scams are only available to billionaires, through companies like Goldman Sachs.

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There are a bunch of these variations, but they all boil down to this: there are lots of ways to sell an asset and buy it again, while making it look like you bought a *different* asset.

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Like, say you're invested in Chinese tech companies through an exchange-traded fund (#ETF) that bundles together "all the Top Chinese tech stocks."

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Maybe you bought this fund through Vanguard, the giant brokerage. Now, say Chinese stocks are way down, because the Chinese government is doing these waves of lockdowns on the factory cities.

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If you could sell those Chinese stocks now, you'd get a massive loss, enough to wipe out all the profits from all your good stocks.

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But of course, China's going to figure out the lockdown situation eventually, so you don't want to actually get rid of those stocks right now, especially since they're worth so much less than you paid for them.

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So right after you sell your *Vanguard* Chinese tech ETF shares, you buy the same amount of #Schwab's Chinese tech-stock ETF.

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An ETF of "leading Chinese tech companies" is going to have basically the same companies' stock in it, no matter whether it's sold by Vanguard, State Street or Schwab.

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But as far as the IRS is concerned, this isn't a wash-trade, because you sold a thing called "Vanguard ETF" and bought a thing called "Schwab ETF" and these are different things (even if the main difference is the name on the wrapper, and not what's inside).

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There's other ways to do this. For example, lots of companies have different "classes" of stock. #UnderArmour sells both Class A (voting) and Class C (nonvoting) stocks.

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Though voting stock is worth a little more than nonvoting stock, they both rise and fall together - if the Class A shares are up 10%, so are the Class C shares.

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So you can dump your Under Armour Class A's, buy Under Armour Class C's and own essentially the same amount of Under Armour stock - but as far as the IRS is concerned, you just sold your interest in one company and bought an interest in a different company.

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You can take a big loss and write down your profits from other stock trades.

The IRS *does* prohibit wash-trading, but only in the narrowest sense.

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Brokerages must report when a customer buys and sells exactly the same security, with the same ID (the #CUSIP number), within 60 days. Beyond that, IRS guidance is wishy-washy, asking filers to "consider all the facts and circumstances" of their trades. Sure, that'll work.

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Propublica found *zero* instances of the IRS targeting any of these trades, ever, for enforcement. That's especially true of the most egregious version of loss-harvesting, a special version that only the ultra-rich can take advantage of, called "#DirectIndexing."

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You might know about "index funds," where a brokerage sells a single fund that tracks a broad index of stocks - for example, you can buy an S&P 500 index that goes up and down with the total value of the top 500 stocks in America.

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Direct indexing is something that giant banks like Goldman Sachs offer to their very richest clients. The brokerage buys a mix of stocks that are likely to track the whole index, and puts those shares directly into the client's account.

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Rather than owning shares in a fund that owns the stocks, you own the stocks directly. That means that when you want to harvest some losses, you can sell just a few of the stocks in the index, rather than your shares in the whole fund.

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Here's how that works. In 2017, the US index was up 20%; global indexes were up even more. Ballmer made a *bundle*. But Goldman Sachs, acting on Ballmer's behalf, sold s few of the stocks in the portfolio and harvested a $100m *loss*.

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Ballmer used that "loss" to trick the IRS into treating his massive profits as though he'd made very little taxable income.

Goldman uses a whole range of tricks to keep billionaires like Ballmer in a lower tax-bracket than the janitors who clean up after his team's games.

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They not only buy and sell different classes of stock in companies like Discovery and Fox; they also buy and sell the same company's stock in different countries.

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For example, they sold Ballmer's shares in Shell in one country, and then immediately bought the same amount of shares in another country.

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The IRS doesn't treat this as a wash-trade, despite the fact that the shares have the same value, and, indeed, companies like Shell routinely merge their overseas and domestic shares with no change in valuation.

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Thanks to Goldman's ruses - and the IRS's willingness to accept them - Ballmer's wealth has swollen to grotesque proportions. He generated $579 million in losses from 2014-18, and as a result, got to keep at least $138m that he'd have otherwise had to pay to the IRS.

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Goldman's not the only one in on this game: #IconiqCaptial - a firm that also offers marriage partner scouting for its richest clients - has $13.2 billion under management on behalf of just 337 people.

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Among those high-rollers: Mark Zuckerberg, whose $88m in gains from Iconiq investments were offset by $34m in imaginary losses that the company manufactured with wash-trades.

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In theory, the simplest form of wash-trading - selling your Vanguard China fund and buying a Schwab China fund - is available to any investor. Leaving aside the fact that the top 1% of Americans own most of the stock, this is still a deceptive proposition.

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This kind of wash-trading only benefits investors who hold their shares outside of a sheltered retirement account, which is a vanishing minority indeed.

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Instead, the primary beneficiaries of this activity are the usual suspects: convicted monopolists like Ballmer, or useless scions of wealthy families.

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Nepobabies like the kids of #Walmart founder Sam Walton, who emerged into this world through very lucky orifices and are thus effectively exempt from the need to work *or* pay tax for life.

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Jim Walton is Sam Walton's youngest orifice-lottery-winner. Young Jim saw a $10 billion increase in his wealth from 2014-18, making him the tenth richest person in America.

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Thanks to wash-trading, he declared only $111 million of that $10 billion on his taxes, and paid $0.00 in tax on that $10 billion gains.

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One way that the rich are especially well-situated to exploit loss-harvesting is in converting short-term gains - which are taxed at 40% - into long-term gains, which are taxed at 20%.

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For people who make a lot of money buying and selling shares as pure speculation, flipping them in less than a year, wash-trading can create the appearance of long-term holdings.

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Analyzing their trove of leaked IRS files, Propublica showed that Americans who report over $10 million in income almost *never* report short-term gains. Instead, two-thirds of the richest Americans report short-term *losses*.

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One wrinkle is that rich people may not even know this is going on. Whatsapp co-founder Brian Acton, managed to "lose" $2.9 million when he sold $17 million in shares - the same day he *bought* $17 million in shares in nearly the same companies from another brokerage.

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Then, a few months later, he reversed those transactions, selling his new fund and buying the old one and harvesting another $600,000 in losses.

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When Propublica asked Acton about this, he told them he was "not really aware of any events like that...Broadly my wealth is managed by a wealth management firm and they manage all the day to day transactions."

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@abigaildisney

This is completely believable and consistent with the extraordinarily frank account of how elite money-management works that @abigaildisney described in 2021.

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Disney showed how the ultra-rich are insulated from the scams, tricks and wheezes that lawyers and accountants dream up to keep their fortunes steadily mounting with no action needed on their part:

pluralistic.net/2021/06/19/dyn…

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Could the IRS block this kind of wash-trading? Yes, but they'd need action from Congress. The most effective way to do this would be to force shareholders to "mark to market" the value of their holdings, taxing them each year on the fluctuations in their portfolio.

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Propublica notes that this is incredibly unlikely to happen. As an alternative, Congress could change the rule that blocks investors from claiming losses when they buy and sell "substantially identical" shares with a rule that applies to "substantially *similar*" stocks.

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This proposal comes from Columbia Law's David Schizer, who says the law "ought to be updated to reflect how people invest today instead of how they invested 100 years ago."

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But for any of that to have an effect, the IRS would have to change its auditing and enforcement practices, which currently see low-income earners (who can't afford fancy tax-lawyers who'll tie up the IRS for months or years) being disproportionately targeted.

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Meanwhile America's super-rich, ultra-rich, and stupid-rich are allowed to submit the most hilariously, obviously fictional returns and get away with it.

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